| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 4 | Clear laws make possible the formation of VC/PE funds (no distinction is made between the two). Several different forms exist: stand-alone funds, fund established subsidiaries of large financial institutions, venture-capital trusts, funds set up by "qualified investors" with high net worth, and Enterprise Investment Schemes (EIU, Country Finance 2006). |
| Tax treatment of VC/PE funds & investments | 4 | Investments in venture-capital trusts are eligible for a 20% tax rebate, reduced from 40% as of April 2005; the eligible amount is up to £200,000 per year. Capital gains and dividends from these investments are tax-exempt. Under the Enterprise Investment Scheme (EIS) type of fund, private individuals obtain tax relief on investments in unquoted companies and offset losses against income tax if there are no capital gains against which to offset them. Corporate taxes are on a progressive scale from 19% upward that benefits smaller enterprises. Companies earning less than £10,000 pay no tax on dividends distributed to shareholders. The sale of 20% stakes held for more than one year are exempt from capital gains tax. (EIU, Country Finance 2006). |
| Protection of minority shareholder rights | 3 | A simple majority passes ordinary resolutions but it takes the assent of 75% of shares to change articles or liquidate the firm. An acquiring firm or investor taking 90% or more can oblige the remaining shareholders to sell their shares. Many large firms have several different classes of ordinary shares, some voting and some not. Financial reporting requirements to the board and/or the public (depending on size of firms) exist, as do requirements for outside auditors for large and medium firms. (EIU, Country Finance 2006). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 4 | There are few restrictions and institutional investors have a fiduciary responsibility to seek the best returns. Insurance companies are free to invest where they choose, provided they follow the “prudent person” rule. They tend to maintain most of their assets in UK company securities. A December 2005 survey by the National Association of Pension Funds showed that equities accounted for 63% of allocated assets of pension funds. (EIU, Country Finance 2006). |
| Protection of intellectual property rights | 4 | EIU Risk Briefing score. Intellectual property rights (IPRs) are generally secure in the UK, although, as in other European countries, pirated software and fraudulent trademarked goods are widely available. Companies are usually able to obtain legal judgements against systematic and large-scale violations of their patents, trademarks, registered designs and copyrights. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 3 | Regulations adopted in 1999 govern insolvency procedures. The current government has pledged to strengthen them but no action has been taken to date. An IDB study in 2005 rated creditor rights as among strongest in world. Under a partnership, partners may be fully liable for debts to third parties; under a limited liability partnership their liability is limited; and under a limited company it is limited to their shareholding or guarantee. (EIU, Country Commerce 2006) |
| Capital markets development and feasibility of exits (ie, local IPOs) | 4 | Average of three EIU Risk Briefing scores. The UK's capital markets are the most developed in Europe, not only in depth and breadth, but also in sophistication. Some 2.700 companies are quoted on either of the two main stock exchanges: around 1,500, including 500 foreign companies, on the main exchange, the London Stock Exchange (LSE), and a further 1,200 on the Alternative Investment Market (AIM). The LSE is the world's third-largest stock exchange after New York and Tokyo. However, the LSE has become an increasingly attractive exchange for foreign firms to list on, particularly following the introduction of the Sarbanes-Oxley legislation in the US. |
| Registration/reserve requirements on inward investments | 3 | There are no exchange controls or reserve requirements. The UK mandates simple reporting of transactions under EU money laundering regulations (EIU, Country Finance 2006). |
| Corporate governance requirements | 3 | A revised version of The Combined Code on Corporate Governance issued by the UK Financial Reporting Council (FRC) was published in June 2006. The main changes to the previous version issued in 2003 provide more flexibility in allowing company chairmen to sit on the remuneration committee, require more transparency in voting rules, and allow a "vote withheld" option for proxy votes on resolutions at annual shareholders' meetings for firms without electronic voting so that shareholders can exercise voice without voting "no." The code sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit, and relations with shareholders. All companies incorporated in the UK and listed on the Main Market of the London Stock Exchange are required under the Listing Rules to report on how they have applied the Combined Code in their annual report and accounts, but the new version of the code is unlikely to apply to listed companies until the second quarter of 2007. In the meantime, the FRC encouraged companies and investors to apply the revised code voluntarily for reporting years beginning on or after November 1st 2006. Outside auditing and annual financial reporting requirements are looser for small and medium firms, and the most stringent corporate governance directives are voluntary for unlisted firms. (EIU, Country Finance 2006, Country Commerce 2006) |
| Strength of the judicial system | 4 | EIU Risk Briefing score. Contractual arrangements are generally secure in the UK. The courts do not discriminate against foreign companies, and the judiciary is of high quality when dealing with commercial cases. Some foreign companies find the tradition of British statute law puzzling, since the acts tend to be more vague than laws in the United States or most continental European countries, and they leave more scope for judicial clarification. However, many statutes have become more prescriptive in recent years. |
| Perceived corruption | 3 | EIU Risk Briefing score. The British civil service is among the world’s most efficient, at least where the issue lies within the discretion of its officials or where there are established administrative procedures for decisions. This is true for statutory grants and contracts. Where significant sums of money are involved on a discretionary basis, the approval of a minister is usually needed. Dealings involving more than one department can be complex and protracted, but corruption is almost non-existent. The situation is more variable at the local-government level. |
| Quality of local accounting industry/use of international standards | 4 | The Finance Act 2004 accommodates changes made to IAS. EU-listed companies must incorporate these changes when preparing consolidated accounts for periods beginning on or after January 1st 2005. IFRS are required in listed firms, permitted in non-listed ones (for all types of statements). (EIU, Country Commerce 2006; IASPLUS) |